In an important development for its lending programme in its biggest country of operations, the EBRD has launched a landmark five-year rouble bond issue to raise local currency that will be used to provide long-term project loans without exchange risk to the real sector of the Russian economy.

The EBRD’s inaugural Rb5bn (€140mn) floating-rate issue breaks new ground as the first placed in Russia by an international financial institution. The EBRD enjoys an AAA/Aaa rating from international rating agencies.

The proceeds from the EBRD’s rouble bond will be used to meet growing funding needs for the renewal of Russia’s municipal infrastructure, as well as the financing of typical clients such as small and medium-sized enterprises (SMEs) and other Russian borrowers with no or limited foreign currency income.

The bond issue is being launched under local regulations and is destined for domestic investors. The issue’s floating-rate coupon is linked to the recently created Moscow Prime Offered Rate, a new money-market index launched under the auspices of Russia’s National Currency Association (NCA). This index is designed to serve as a transparent benchmark for top-rated financial institutions wanting to raise funding in roubles.

Application will be made for the prospectus of the issue to be registered with the Federal Financial Markets Service (FFMS). The EBRD’s decision to issue the bond was registered by the FFMS on May 13.

Upon registration of the prospectus, the EBRD will apply for its bonds to be listed and traded on the government bond section of the Moscow Interbank Currency Exchange (MICEX) and for the Central Bank of the Russian Federation to include them in its Lombard list. Inclusion in this list would allow EBRD bonds to be used by bank investors for repo transactions with the central bank.

Citigroup and ZAO Raiffeisenbank Austria are the joint lead arrangers of the primary placement, with 10 other Russian and international banks participating in the underwriting syndicate. Senior co-lead managers are ING, International Moscow Bank and Vneshtorgbank; co-lead managers are Commerzbank, West LB, ABN Amro, Gazprombank and HSBC; and co-managers are Deutsche Bank and JP Morgan.

Eight banks will be contributing quotes to the new MosPrime Rate. These are ABN Amro, ZAO Citibank, Gazprombank, International Moscow Bank, Raiffeisenbank, Sberbank, Vneshtorgbank and WestLB. This rate is set daily and gives the rates at which contributor banks are prepared to lend money to top-rated financial institutions for periods of up to three months.

The calculation agent for the issue, ING, will on a quarterly basis determine the coupon rate for the EBRD bond. The coupon rate for the first three-month period has been determined at 4.04% per year and will be reset every three months in line with the then prevailing MosPrime offered rates.

In order to ensure the consistency and credibility of the rate, the contributing banks have agreed with the EBRD to quote firm rates – with their bids not wider than 50bp below their offered rate quotations. The National Depository Centre (NDC) will act as the sole depository for the issue.

This is an important milestone in our efforts to provide financing for key projects which cannot rely on export revenues to repay foreign currency loans, says Steven Kaempfer, the EBRD’s vice-president, finance.

The EBRD has been tapping the local currency market in Russia for short-term promissory note issues for some years but we have long been working with the government and market authorities in Russia, especially the FFMS, central bank and MICEX, to prepare access for foreign issuers including international financial institutions to the longer-term rouble resources that the bond market can provide, Kaempfer adds.

We believe that this issue and the introduction of the new MosPrime rate have the potential to make a major contribution to the development of Russia’s capital markets, Kaempfer says.

Charlie Berman, co-head, European Fixed Income Capital Markets at Citigroup, comments: “The EBRD has again demonstrated that it remains at the forefront of the development of the local currency markets in the region. This groundbreaking transaction in Russia has not only successfully opened the Russian capital markets for other international issuers but established a reliable money-market index in the domestic market, thus making another substantial contribution to the development of the Russian financial system. It is tangible proof of the bank’s commitment to Russia and the sophistication of its capital markets operations.”

Michel Perhirin, chairman of the board of ZAO Raiffeisenbank Austria, stresses the importance of the introduction to the Russian market of the first floating rate bond issue linked to a money market rate.

He says: “Establishment of the true rouble floater will further help the access of the Russian issuers to long-term funding at competitive rates. He adds that the EBRD paves the way for many international and local issuers considering financing their investment projects through Russian capital markets.”

Of the bank’s 27 countries of operation, Russia’s is the single biggest target of EBRD funding. Since its inception in 1991, the bank has committed €5.87bn to Russia in 212 stand-alone projects. As at the end of 2004, Russia represented 24% of the EBRD’s outstanding portfolio.